Uncovering the Hidden Gems: How Small Cap Stocks Steal the Limelight in Global IPOs

UK-based chip designer Arm, which recently went public on the Nasdaq and raised $65 billion in a short span of time, sparked hopes of a revival in the global market for initial public offerings (IPOs) after a dull 18-month period. However, Arm's shares have not seen significant growth, with the stock currently trading at $54 per share, close to its issue price of $51. Similarly, grocery delivery firm Instacart, which also went public on the Nasdaq, experienced a surge in its shares initially but is currently trading at its issue price of $30 per share.

The lukewarm reception of those deals suggests that Wall Street may still be affected by the aftermath of the post-pandemic IPO bubble collapse in 2022. Lesser-known markets worldwide are performing better, offering an alternative for local or regional companies seeking to attract equity investors for the first time.

Although the US remains the largest IPO market, emerging economies' stock exchanges have accounted for three-quarters of the total funds raised through IPOs globally this year, surpassing the previous five-year average of 66%, according to a recent report by accounting firm EY. These markets have also seen a rise in IPO activity, attracting 77% of all IPOs, up from 61%.

Turkey and Romania, as new players, have recently entered the booming IPO market in Indonesia, Malaysia, and India. It is worth mentioning that out of the nine mega IPOs worldwide, raising a minimum of $1 billion, seven have taken place in emerging markets, according to EY's observations. The reason behind this trend is quite straightforward, as George Chan, the global IPO leader at the firm, explained to CNN: "Economic growth is the driving force."

Center stage

Indonesia is a striking case in point.

With a population of 274 million people, the Southeast-Asian country has surpassed Hong Kong as a leading destination for initial public offerings (IPOs) after nearly thirty years. Furthermore, it currently ranks as the fourth-largest IPO market globally in terms of deal value, with $3.2 billion in deals so far this year, as reported by data provider Dealogic. This places the country behind the United States, the United Arab Emirates, and China.

Indonesia's influence surpasses expectations due to its possession of highly sought-after resources: Extensive reserves of metals crucial for electric vehicle batteries and other minerals essential for energy transition, including nickel, copper, and cobalt.

According to Dealogic data, the metal, steel, and mining sectors contribute to nearly two-thirds of the overall worth of the country's IPO deals this year.

This picture taken on February 10, 2023 shows a factory of the state-owned Antam mining company in Pomalaa in southeast Sulawesi.

Adek Berry/AFP/Getty Images

Metals-rich Indonesia's IPO market is so red-hot it's thrashing Hong Kong and India

Chan believes that the rise of Indonesia as a powerful IPO hub will entice foreign companies to consider listing in Jakarta. He emphasizes that once a positive market sentiment for a specific industry is established, even non-Indonesian market players are likely to be drawn to the city as the local investors possess a comprehensive understanding of the business.

Other smaller exchanges are also experiencing a period of prominence.

The largest IPO in Europe for 2023 did not take place in Frankfurt or Paris. Instead, the Bucharest Stock Exchange took the spotlight when Romanian utility Hidroelectrica went public in July, with a deal worth $2 billion. This listing now ranks as the world's fourth-largest so far this year.

Further south, the year-to-date value of IPO deals on Turkey's Borsa Istanbul has reached an impressive $2.3 billion, surpassing the value of deals on the renowned London Stock Exchange by more than two-fold. A significant factor behind this remarkable performance, as highlighted by Chan, is the tremendous surge in activity from Turkish retail investors who are eagerly seeking lucrative opportunities in the equity market. With the erosion of their spending power due to soaring inflation, these investors are drawn to equities as a means of gaining substantial returns.

Higher for longer

Bigger initial public offering (IPO) markets have struggled to commence this year due to various factors.

According to Chan, Hong Kong's progress has been hindered by unfavorable valuations, and on China's mainland, a number of promising companies are unable to go public due to regulatory constraints. However, Chan predicts that these restrictions will ease in the coming six to twelve months.

Hong Kong Exchange Square in Central on June 2, 2023.

Xiaomei Chen/Reuters

Hong Kong stocks have worst day in three months on worries about rates and real estate

High interest rates in Europe and the United States have limited the potential of listings, as they have increased the returns on safe assets like government bonds and decreased investors' willingness to take risks. This situation is especially detrimental to tech companies, which represent nearly 40% of the total value of the US IPO market this year according to Dealogic. These companies are particularly vulnerable to rising borrowing costs, as investors are less inclined to invest in firms that may take years to become profitable.

According to Dealogic, listings on Wall Street this year have been valued at $18 billion, experiencing a 64% increase from 2022. However, this amount is still significantly lower than the $289 billion recorded in 2021 and the $203 billion in 2020.

Dealogic also reports that globally, 2021 was the most significant year for IPOs in terms of both the number of listings and the total value of deals. This was attributed to a combination of historically low interest rates and the influx of government stimulus due to the ongoing pandemic.

Traders work on the floor of the New York Stock Exchange on September 26.

Michael M. Santiago/Getty Images

Kevin Gordon, a senior investment strategist at Charles Schwab, thinks the "dust is still settling" after that bubble burst last year.

The market crash was influenced by the market's soaring heights as well as investors becoming less inclined to finance stock purchases due to the increased costs of borrowing. Investors are preparing for interest rates to remain elevated for an extended period of time following the Federal Reserve's indication of a possible rate hike later this year, along with the expectation of fewer rate reductions in 2024 compared to previous indications.

Gordon told CNN that the Federal Reserve's reluctance to lower interest rates significantly or to near zero level has a significant impact on the IPO market. However, according to EY's report, investor sentiment is improving in major Western economies, with US exchanges attracting the highest number of IPOs by overseas companies this year.

Not a pretty picture

According to Samuel Kerr, senior equity capital markets editor at Dealogic, the United Kingdom's IPO market is facing significant challenges, and losing the Arm IPO to New York was a painful blow. In 2022, the country fell out of the top 10 global IPO destinations and has remained outside since then, as per Kerr's statement to CNN.

This occurrence has only occurred once in the last two decades, specifically in 2009 following the global financial crisis. The UK's capital markets have been adversely affected by the attraction of big tech firms towards Wall Street, leading to a decline in local stock exposure by the country's pension funds.

The status of London as the center of European finance has been undermined by Brexit and years of political turmoil, which in turn has negatively impacted the UK's reputation among investors. Kerr suggests that the decline in the UK's IPO scene is partly due to Brexit, but also due to the increasing dominance of stock exchanges in emerging markets.

He informed CNN that companies currently opting to list on their local stock exchanges would traditionally have been the type of issuers that previously preferred to list in London. According to him, the IPO data from the UK does not paint a favorable picture.